A monetary mechanism for sharing capital: Diamond and Dybvig meet Kiyotaki and Wright
A model is presented in which banks update public records, accept deposits of fiat money and intermediate capital. I show that inside money is more liquid than outside money, increasing the turnover rates of idle capital. The model offers a simple explanation for the dual role of financial institutions: Banks are monitored and can issue nominal assets upon request, which helps them to transfer capital in sufficiently high rates and to also become intermediaries. The model shares some features with those of Diamond and Dybvig , and Kiyotaki and Wright .
KeywordsBank Sector Participation Constraint Sharing Capital Bank Capital Money Holding
Unable to display preview. Download preview PDF.
- [1.]Andolfatto, D., Nosal, E.: A simple model of money and banking. Federal Reserve Bank of Cleveland, Economic Review 37(3), 20–28 (2001)Google Scholar
- [2.]Cavalcanti, R. de O., Erosa, A., Temzelides, T.: Private money and reserve management in a random matching model. Journal of Political Economy 107, 929–945 (1999)Google Scholar
- [4.]Cavalcanti, R. de O., Wallace, N.: Inside and outside money as alternative media of exchange. Journal of Money, Credit and Banking 31(Part 2), 443–457 (1999b)Google Scholar
- [5.]Diamond, D., Dybvig, P.: Bank runs, deposit insurance and liquidity. Journal of Political Economy 91, 401–419 (1983)Google Scholar
- [6.]Friedman, M.: A program for monetary stability. New York: Fordham University Press 1959Google Scholar
- [7.]Kiyotaki, N., Wright, R.: On money as a medium of exchange. Journal of Political Economy 97, 927–954 (1989)Google Scholar
- [8.]Wallace, N.: Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously. Federal Reserve Bank of Minneapolis, Quarterly Review Fall, 3–16 (1988)Google Scholar